By James Barrack, Senior Surveyor, Operational Services, Alternative Real Estate Advisers (AREA)
Operational real estate assets, particularly in the Living sector, have the power and responsibility to influence the way people live. From utilities usage to resident wellbeing, to accessibility and placemaking, operators of these assets can be the facilitator of change because they are the interface between the building, the way it is engaged with by its users and the relationship it has with the built environment and wider community around it.
Operators of those assets appoint third party suppliers, advise on resident wellness, guide pricing, are the interface with the resident, employ and empower site management teams, troubleshoot, collect data, report to the investor and so on and so forth. As a result of this wide-reaching role, you could argue, operators, not just the developer and investor, hold the key to unlocking ESG in the Living Sector.
The team at AREA are now running operator selection processes for some of the most high-profile asset managers in the UK. The chosen operators are expected to be able to make a positive difference, not just to the financial performance, but also to resident experience and the impact that the building will have on the environment.
This is important. Investors are well informed, they know that the approach an operator takes to environmental building management and social accountability with residents will, in the long term, impact the financial performance of the asset or portfolio.
All operators include ESG in their strategy – they must if the asset is to be compliant. However, the depth of understanding and detail applied shows us who is a real leader on the topic and who will stop at surface level necessity.
Thus, many AREA run selection processes start with the question, how can you take responsibility for ESG during your operational role and, moreover, drive the agenda and influence potentially thousands of people at the same time? We think we are at the forefront of thinking about this and as a result we now embed extensive ESG KPI benchmarks into Property Management Agreements.
If an operator doesn’t perform on ESG, there should be no hiding. KPIs that operators are required to sign up to by AREA mean underperformance can reduce remuneration levels, or in certain situations, can lead to termination of their role. However, with every ‘stick’, there is a ‘carrot’, and therefore the operator has an opportunity to generate additional renumeration if they outperform individual and aggregate targets. Afterall, if the client wins by reducing utility consumption and the operator is innovative in how this is achieved, why would that saving not be shared? And that’s even before the huge corporate social responsibility benefits which both the operator and investor receive from simply behaving responsibly.
Compliance with targets set by central Government, by the industry and by Investment Boards is expected but companies in the sector will have to do more, especially if the next wave of MEES dates continues, tightening efficiency further – potentially even to a ‘B’ EPC rating by 2030. What AREA therefore look for is the next level up from what is current industry best standard, and even from what we expect to come down the line. Through our Operational Oversight role, we ask ourselves, how can the operator and the asset set an example and lead into the future? How can initiatives add value in terms of commanding more premium rents and better occupancy from more conscientious tenants, and how can it save costs through more efficient operations, thereby improving the bottom-line performance?
Working with AREA, investors are beginning to expect operators to go much further. Data collection is by example, helpful for reporting within client organisations, showing how corporate objectives on carbon usage are being achieved. However, operators we work with are now setting the objective of taking collected data and using it to persuade conscientious residents, through bespoke marketing collateral, that they should book, or rebook based on that specific asset’s ESG qualities. Afterall, we think there is more to promoting an assets environmental credentials than simply an EPC certificate on a booking portal webpage!
Investors also expect environmental data to drive investment decision making. Operators are at the forefront of making this happen. Take for example, accretive capital projects. Historically spend has been focused on customer touch points, amenity, apartments or rooms. Investors are now expecting Mechanical, Electrical and Plant (MEP) to be at the forefront of these accretive investments. The operator should hold the key to this, given their specific expertise of what areas of investment in MEP will achieve the greater return on cost by reduced operating spend.
Another example is social initiatives. The living sector continues to have a disproportionally higher turnover of staff compared to other sectors. By focusing further on the ‘Social’ aspect of ESG at the outset of operator selection, with the investor championing investment in staff via training and empowerment, they are ensuring the operator has the correct support to enable career growth, and with it, long term operating cost reduction. Lowering staff turnover reduces recruitment, the reliance on temporary staff costs and gives more accuracy to wage spend in operating budgets. By focussing on creating a career, not just filling a vacancy, operators can champion real change with initiatives such as apprenticeships embedded in the operating budget. Ultimately, if done right, everyone wins: staff, operator and investor.
In the Living Sector, the ‘G’ in ESG is easily forgotten. It’s too easy for improving reporting standards to be the pitch by operators. Good reporting is critical to maintain transparency and trust, but this should be taken as a given. What investors now want is the reassurance that operators are consistently identifying risks and tackling them before the risk is visible, let alone problematic. Investors want to hear operators talking about their supply chains – showing how they keep records of all suppliers that are used, where they come from: are they supporting the local community, are they paying their staff minimum wage or real living wage?
So, who should be leading on ESG? Is it the Investors’ corporate objectives that are driving change or should it be the operator influencing the change on the ground? Are each party looking at the other expecting them to make the next move or set the strategy? We’d argue it’s the operator from the ground up who should be leading because they are in the weeds of operating the assets. If your operator isn’t doing this, maybe its time for a change.
The operating sector needs to be ready to answer all of these questions and that doesn’t come without a truly forensic approach, knowing that every detail is captured, and every risk pre-empted with the asset secure and performing. In 2024, it is this approach that gives investors competitive advantage.
